By Noble Hart
Staff Writer
Money is a large part of everybody’s life. It’s how we exchange goods and services, how our society functions, and even how we can live a comfortable life. Despite this, many people aren’t fully aware of how best to manage their money. As a result, most people are financially unstable in their day-to-day lives. However, there are several steps you can take to improve your financial literacy.
Financial literacy is the ability to understand managing your money through means such as budgeting, investing, and managing credit. Each of these will allow you to achieve greater opportunities in one way or another. They all have different benefits and will work in tandem with one another to give you financial stability.
Starting with budgeting. Budgeting is simply a plan that you have in place for your money that usually involves saving it. Budgeting encourages you to spend wisely and gain discipline. It doesn’t have to be complex; it can be as simple as just setting a monthly limit for yourself and not going over it. There are a few ways to budget more effectively. For example, the 50/30/20 budget is when you put 50% of your net pay—the amount of money you receive after taxes are taken out of your paycheck—into needs such as groceries and bills, 30% into savings for retirement or emergencies, and 20% into any splurging, such as vacations. Budgeting is arguably one of the most important parts of being both financially literate and stable, because without it, financial stability is near impossible.
Another crucial part of financial literacy is managing your credit. Credit is merely your history of borrowing money. Paying the money back on time gives you good credit, and paying it back late gives you bad credit. While this might not seem important, having good or bad credit could be the difference between renting an apartment, buying a house, or even getting a job.
There are two kinds of reports you can get for your credit. The first, a credit report, is a detailed overview of your credit history, previous employment, and personal information. It is important to get a copy of this report each year, as it is one of the few ways to find out about any fraudulent activity in your credit. The second one, a credit score, is based on your credit report at a small point in time. These scores can range from 300 to 850, and bank lenders will often give loans with higher interest rates and fees to people with lower scores. The reason is that a low score is seen as high-risk for the banks, since they might not receive the money they lend to a person with a low credit score. The trick to having a good credit score is to start early, since the amount of time you’ve had a credit score can play a big part in the loaning process.
Next is investing—a form of passive income that helps you increase the amount of money you have by buying business stocks or real estate. Investing is important because it can cause your money to appreciate, or grow in value, faster than a normal savings account. This means that you will have more money to achieve long-term financial goals such as retiring or buying a home.
Accounts like Individual Retirement Accounts (IRAs) are designed specifically for investments and retirement savings. Similarly, another account that can help with this is a 401(k). With these accounts, employees can choose to have a portion of their paycheck put into this account, and the value will grow based on the account’s performance. However, employers will occasionally match the amount of money put into the 401(k), setting it apart from a traditional IRA.
Keep in mind that once you withdraw money from either account, it will be taxed as if it were a standard income. Not only that, but most forms of investing, such as stocks and real estate, or even an IRA, can potentially decrease in value over time, meaning it isn’t 100% safe. However, it is still worth investing since the potential gain often outweighs the potential loss.
Lastly, but without a doubt the most important part of financial literacy, is research and knowledge. Without the proper knowledge, you can’t get far, no matter how much you budget or invest. There are several places to gain more information about being financially literate. You can take in-person classes at Forsyth Tech or online via Khan Academy. If you don’t want to pay for a Forsyth Tech class and don’t have a Khan Academy account, you could always do a quick YouTube search. Just doing this alone can help you vastly in the long run. Remember, it’s never too early to learn how to manage your money.